Q2 2019 Earnings Call

And in their thinking about.

The whole company.

We are seeing more and more clarity.

Inside of the company, the decisions that they're making and making more sense for us.

And we think we can see where centurylink hasn't.

A relatively small amount of spending and so we don't view that as being.

Something that's kind of risk.

Our projections.

Got it okay.

Great and then you talked about the 33 customers that she brought in this quarter and you're having certainly a lot of success can you.

If I go back and look at the history of the company I mean, you guys have always had.

A large number of customers and I think historically you have had success in adding customers, but it seems like you're talking more aggressively about the diversification of the company and I guess I'm just trying to understand exactly what's what's different here is there a John Rowe of customers that are coming in or a theme that we can talk to that kind of helps explain the customer additions and exactly why that's translating into more material diversification of the company where in the past that's been a problem.

Yeah. The diversification so let's go back Paul because obviously you are.

Well familiar with the history of the company having been at the IPO.

The customer base.

Was diverse from the standpoint of pounds.

But not tight.

So when the company was founded it was really founded that bring broadband access to wireline service providers.

And so what Alex if you will one died oded was it built a diverse customer base, but they were all ilex iaci large and small.

As we've done due to the platforms and how we view the world, We don't view and have not for a long time now.

IMAX any different from cable Msos, our sea legs are with us.

Or cooperatives or municipalities or whomever.

And so we view the emerging communication service providers as those people that want to provide an essence access services to their subscribers.

That's uniquely leveraging of our platforms, because when we deployed enhance to assist them.

At a small cable MSL.

It's the same ekso assist axcelis system that Verizon is deploying our city fibers decline.

When we deploy an exogenous subscriber edge system that are with us.

It's the same here so our system that we would deploy into traditional Io C.

And so we now view that diversification.

As we're not trying to consciously diversify the business. We're trying to in fact go reach all of what we believe will be the winning service providers of the future and they happen to come from all different.

Types. So it naturally ends up diversifying the business does that help.

Yeah. It does.

Is the theme here is simply that you've got more and more folks out there over building existing incumbent networks is that.

Is that what you are having incremental success.

Tom This is very clearly happening there's now capital formation.

Behind clean sheet service providers, which really didn't exist three years ago.

No city fiber could be a more recent big Shining example of it.

But there are lots of small service providers that are growing by like a weed.

Serving underserved areas.

And so yes. It is a key part of what's going on.

From a CSP standpoint im not.

And as I've said in our notes, we're going to continue to work with all of our customers.

And even some of the more challenging hands that exists which is a more copper base.

Service provider that is carrying a lot of debt, that's a tough hand to play.

But we are finding ways to take our platforms and help them succeed.

As well.

But very clearly.

You are now able to build.

A service provider from scratch.

With a wholly different physical architecture logical architecture operating system and business model.

And get funding.

Great. Thank you.

You're welcome.

Thank you once again Thats star one for questions. Our next question is coming from Tim Savageaux of Northland Capital go ahead.

Hey, good morning.

I want to continue to focus on the growth dynamics and various customer segments of the business.

Yes, if you look at what you just disclosed with Centurylink for Q2 in terms of imagine something similar for Q3.

Yeah that looks to be down something in the order of 20, 530% year over year.

My assumption and this is also my question to start with.

Is that the balance of the tier two universe is down more than that.

Maybe a lot more just given.

Yes, some of the headlines and asset sales that we see around the frontiers in windstreams.

Of the World. So you know as you look at your Q3 guide if you kind of carry those assumptions in there.

It looks like the rest of the business.

Is set to grow double digits.

They may be solid double digits.

That math doesn't really work for the first half given the manufacturing issues.

But overall I am I looking at that right as I look at your Q3 guide and year over year growth rates in the segments are close to right.

So, yes pretty close to right I want to I want to be careful on Centurylink.

No Central Bank was $80 million last year, as we continue to align with our platforms and where we're heading and work with them.

And they're not they're not going to be down by by the number you said they might be down by 10% to 12%.

So I don't want you to get to over center on that.

So that's probably a better approximation, but yes to your point in the general direction.

There was a there is a pretty rapidly growing business underneath all of this.

We just have to get out from underneath all of this.

And the biggest part of the out from underneath all of this was what you cited.

Which was a space thats been under terrible duress.

Maybe you could anticipate a chapter 11 filing maybe not maybe you could anticipate lots of asset spin offs and sales.

Dividend restructuring et cetera, but.

In General you can look out in the future and so you can see all of those things potentially happening, but man has a lot of that have a lot of them happened in the last few quarters pretty rapidly.

And so that's where we've seen the biggest duress.

It's happened quickly it's happened more quickly than we anticipated, but now we're sitting here in a position where it's just not a meaningful effect on.

Our ability to predict the business going forward.

So that's my way of.

You said.

Yeah, Okay Directionally.

Sounds like come close here and then what's likely to drive that growth and also be the focus of your customer additions is.

Kind of a the biggest piece of the business that I think we might have the less the least.

Kind of visibility on moving part wise and that's you know.

Municipal carriers tier threes.

This very small I likes if you will.

Which look to comprise something on the order of half the business.

I Wonder if you could describe kind of well to the extent it's possible.

To describe trends across you know a pretty optimize group.

Can you talk about kind of growth expectations in that segment in particular.

What.

What sort of dynamics are driving that.

And.

In terms of overall funding.

I mean, maybe or just kind of your own view as to why the the tiny guys seem to be faring.

Better than the mid tier whether thats seen a lack of.

No material competition or or what have you, but I'd just be interested in any kind of color you can give us on.

Kinda that a tier three dynamic that looks to be.

Outside of your the big guys that you've mentioned previously a key growth driver for the company.

So I will I won't violate what I said to Christian which is at a high level I was being able to project the business growth rate going forward, we want to get a couple of quarters of growth behind us having been through these headwinds before we start to say at a high level.

Here's what the right growth expectations are but I'll take your question is sort of saying well underlying this what are some of the drivers what are you seeing.

So.

There there is no question, but I go get.

Employees from our existing customers legacy customers new customers.

If you put everybody in a room and said Hey, let's go build a new service provider every single one of them to build a better network.

A more efficient way of doing business and ultimately a much more efficient business model on top of a clean sheet business.

No different than any other business.

But in the service provider space are dealing with such long product lifecycle.

That the weight.

A legacy.

Versus the benefits of legacy can flip over on you if someone is able to build a clean sheet service provider.

So managing all of those legacy assesses I mean, it's it's almost a gordian not that these folks are dealing with.

And so I think if you sat down with any catchment said.

What if you could would you like to build your company from scratch again, the answer would be yes, well. There are now people that are doing that and they're getting funding.

And so they take the platforms that we have built.

And.

If I said, Tim Here's some money to a certain service provider and you took calix cloud analytics, yet so much that the subscriber edge and so as the network used it in an open environment to build your ROE assesses Mbss is.

These networks.

Our usually capable of revenue.

They have the lowest cost per bit per mile. You can run them with very few people and so it just becomes a withering competitive framework.

Some of them are west some of them are co ops. Some of them are clean sheets. Some are municipalities. Although that's by no means the biggest space some of them are electric cooperatives evolving.

It runs the gamut what they have in common.

Is there typically building, an all fiber and wireless infrastructure.

We are winning them with our platforms. So earlier you know Christian that asked the question about product markets versus customer segments. I will tell you that virtually all of the 33, new customers that we added and this is true for the last bunch of quarters now.

Our one with our new platforms, they're not one with our traditional products that.

So they're just building a very very different looking.

Communication service provider.

Does that help.